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Independent view

It was about five years ago when I moved my client bank to a fee basis.

This was for three reasons – I had more and more clients asking to work on a fee basis, the type of client I wanted to deal with wanted to work on a fee basis and, finally, I had a short spell of doing some unprofitable work for which I was not paid, which did not seem quite right.

Moving a client bank over to a fee basis is not an easy task. I raise this because, with the advent of the menu, a growing number of IFAs will be considering moving to fees rather than charging commission.

As we know, commission can be lumpy. You can earn a lot of money for not doing a great deal of work and you can do a lot of work for not a great deal of money.

Clearly, this is not a very sensible way to operate a business as time spent and income earned should be more aligned. I do not intend in this article to debate whether fee-based advice or commission-based advice is better as both have their merits depending on the type of clients one deals with. However, I do think the advent of the menu means more clients will be demanding a fee-based option.

For top-end clients, working on a fee basis can have many advantages as the impact of reinvestment of commission on the overall charges of an investment can be high. For many IFAs wanting to deal with higher-end clients, working on a fee basis will align their wishes with those of the client.

From an IFA’s point of view, a fee menu is a much simpler document. It is much more focused upon client service and advice, without streams of figures, many of which may not be relevant to the client.

On the other hand, the commission-based menu will cover a number of matters. How relevant is it to a client who requests pension advice as an example to see the comparisons for a whole of life contract.

There is a belief that printing market averages will prompt clients to shop around more. This view is too theoretical and does not understand the subtleties of adviser/client relationships. Clients do not shop around much because it involves the luxury of time and effort that most clients do not have. If they are happy and believe the adviser can provide them with the services they want within a reasonable price, then they tend to stay.

However, while I do not think the menu in itself will promote shopping around, I do think it will spell out in greater clarity what a client pays for and what they get. This has to be good news for the industry, where obfuscation is a criticism which is levelled at us with some justification.

The one thing I did find when I moved my clients to fee basis is that clarity is essential. Discussing fees face to face with the client and explaining what they are paying for and what service they will get is fundamental. It is also important to keep reminding them.

When you review your clients a year down the line, they will have forgotten that in the investment report you produced for them you stated how much it was going to cost them at a review. It is much better to deal with this face to face than it is to simply send an invoice.

I can see that the commission-based menu may encourage clients to negotiate the commission they pay or perhaps, more prevalently, ask a particular IFA why they are more expensive than the average. Any IFA who cannot answer that question should consider what value they are providing for the client.

I am in favour of the menu and hope it will improve clar-ity and good relations between IFAs and their clients. I think it is an important document which needs discussion with the client and should not be glossed over. If it is treated as simply just another piece of paper which is handed to the client, then much of the good value it could provide for an IFA in dealing with clients will be lost.

It will be very interesting to see how firms develop their menu and how they use it. It is better to embrace this document and use it to your advantage than to treat it as a tedious side issue which needs to be addressed but you would rather not.

My instincts tell me it is those firms that make the best use of the menu which will be the firms of the future.

Amanda Davidson is financial planning director at John Scott & Partners


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